Transportation Systems Casebook/Ride-sharing

Overview
Providing rides as a service is as old as the car. Formalized taxicab or hackney carriage services began in Europe in the mid-17th century. Modern-day “ride-sharing,” defined as transportation services provided through Transportation Network Companies (TNCs), is the latest evolution in the concept of for-hire private vehicles. This new, innovative offering certainly does not come without scrutiny and opposition. Regulatory oversight has been limited, if existent at all, as ride-sharing technology using smartphones has deployed across the United States. Only in September 2013 did California become the first US state to enact formal regulation of ride-sharing services. Other states, counties and municipalities are likely to follow.

Actors
 Ride-sharing companies Companies that organize “prearranged” transportation services by using a smartphone application to connect for-hire drivers using their personal vehicles with riders. Industry leaders include, Uber, Lyft, and Sidecar. These companies are commonly referred to as Transportation Network Companies (TNCs), as they do not actually provide transportation services, but only serve to connect the provider with the user. Uber, Lyft and Sidecar each retain a maximum of 20% of the fare the user pays with his or her credit card through the app and forwards the remainder to the driver's account.

Hailo is a British firm that employs a new mobile application platform that matches taxi drivers and passengers through its smartphone application. Unlike the ride-sharing companies, Hailo uses exclusively fully licensed and regulated taxicabs in each jurisdiction in which it operates, rather than individual drivers using their private vehicles as de-facto "limousines." Hailo recently announced that it is exiting the North American market, but will continue to serve European and Asian markets.

Ride-Share drivers Individuals who provide for-hire rides to ride-share users using their personally owned vehicles. Drivers choose when they want to provide their service, as long as they meet the minimum required hours per company regulations, and meet other company requirements concerning age of vehicle, insurance coverage, clean driving record, clean criminal background, etc.

Ride-Share riders  Individuals who "order" a ride using the smartphone application of a ride-sharing company, seeking transportation from one point to another.

Taxi Drivers Individuals who operate fully licensed and regulated taxicabs, usually in larger cities and metropolitan areas. A driver can be the owner-operator of a single vehicle, a member of a driver-owned cooperative, an hourly employee or contractor of a taxicab firm that owns a fleet of cars, or a contractor to a firm who nevertheless uses his or her own vehicle. Taxi drivers must meet all the regulations issued by the state or municipality in which they operate, including licensing, insurance, vehicle safety, and fare and service-level regulations.

Taxi riders Individuals who use the services of regulated taxicab companies and pay the established fares, usually determined by a meter installed in the taxi that charges by the distance driven, plus a minimum fare and taxes or fees. In spite of the advent of smartphone applications, most riders secure a taxi by hailing one on the street, finding one at a taxi stand, or calling for a radio-dispatched pick-up.

Taxi and limousine operating companies Private firms that either own a large fleet of for-hire vehicles or contract with a number of individual drivers who own their own vehicles. They can either be owned by one or a few individuals and centrally managed, or can be driver-owned cooperatives owned by their member drivers. These firms are subject to local and state regulation where applicable, and many cities and towns are served by only one or two taxi or limousine companies.

Taxicab commissions Local regulatory bodies, part of a city or county government, that issue and enforce regulations applying to taxicab (and, in many cases, limousine) operators within their geographic jurisdictions. They are governed by boards that are generally appointed by the local legislature (generally the City Council) and/or chief executive (generally the Mayor).

Public Utilities Commissions The name of the state government agency in each of the eleven US states that have state-level regulations affecting taxicabs. State-level regulations are usually generalized and deal with safety, insurance and competition between taxi and limousine firms. It is usually the responsibility of local jurisdictions to enforce these regulations (in localities without a Taxicab Commission, this responsibility lies with the local police department).

Timeline of Events

 * 1915 - First regulations on taxis
 * 1929 - Chicago Taxi Cab Commission forms
 * 1941-1945 - Modern development of car-pooling during WW2
 * Mid 1970s - First organized VanPools
 * 1975 - "Slugging" first appeared in Washington, D.C.
 * June 2010 - Uber launched
 * December 2011 - Uber launched internationally
 * February 2012 - Sidecar Launched
 * June 2013 - Lyft launched
 * September 2013 - California becomes the first state to regulate ridesharing
 * June 2014 - Colorado regulated ridesharing at the State legislature level
 * October 2014 - D.C. Council passed a bill allowing ride-sharing services to operate within the law in the District

Origins
The origins of the modern taxicab date back several centuries. Practically as long as there have been vehicles that could accommodate multiple passengers, from the earliest horse-drawn carriages, there have been drivers who charged others for the privilege of being chauffeured from place to place. The first modern taxis appeared simultaneously in the United Kingdom and Germany in the late 18th century. The word “taxi” comes from the taximeter, the mechanism most taxis use to determine the fare, whose name is derived from the word “tax” because the meter determines what tax the rider will pay. The first taximeters appeared in Germany, and were soon adopted in the United Kingdom, where what became known as taxis were then called hackney carriages, a term still used today. These were originally very heavy horse-drawn carriages, but were replaced in the early 19th century by a lighter-weight carriage called the cabriolet. The "taximeter cabriolet" eventually gave us two shortened forms, "taxi" and "cab." Regulated for-hire vehicles can be divided into three types:

Roving taxis can accept street hails or pick up passengers at taxi stands: generally at airports, train and bus stations, and large hotels.

Radio-dispatch cars (also sometimes referred to as limousines) can be requested only by prior arrangement or charter.

Jitneys are large cars or vans carrying groups on scheduled or pre-arranged trips. (The word “jitney” originated in Los Angeles as slang for a nickel, which is the fare that taxi-van operators there charged during an economic downturn in 1914.)

In some places, “livery services,” which can only accept radio-dispatch and contract trips, are separated from limousines, and regulated differently. 75% of all taxi or limousine trips (excluding jitneys) in the US are performed by radio-dispatch cars, with the majority of the remainder coming from taxi stands, with less than 10% being street hails. In general, taxis charge by the metered distance, while limousines charge by the hour. Note that these figures exclude ridesharing services such as Uber and Lyft, as well as unlicensed and unregulated “gypsy” or “wildcat” cabs, the latter constituting an underground “black market.” Uber and Lyft’s fares factor in both distance and time, making them a hybrid between a taxi and a limousine.

Innovations
Uber, Lyft, and Sidecar have all evolved using modern technology to put a twist on the centuries-old for-hire vehicle concept. Such companies and their adopted technologies have captivated consumers and left the taxi industry facing unprecedented challenges to its dominance of the for-hire vehicle market. Riders love Uber, Lyft and Sidecar. These innovative services offer reduced costs, ease of payment, a real-time map showing nearby drivers and allowing users to track the driver they have requested, driver ratings, and -- for one company, Sidecar -- a complete profile of the driver you chose to hire. Uber, which dominates the ride-sharing market and serves more cities worldwide than any other TNC, provides service in 108 US cities and 45 countries worldwide.

All three companies accept payment via stored credit card numbers -- one of the most attractive features of e-hailing. Additionally, the digital dispatch application gives riders the power to submit ratings on the reliability of individual drivers, which are visible to the driver and to other riders anonymously. Similarly, they also allow for drivers to rate riders anonymously. This two-way feedback mechanism is not in place with taxi services, thus providing ride-sharing companies with a great argument for safety. The only way to submit feedback on a taxi ride is to call the taxicab company or file a comment or complaint with the local Taxicab Commission.

According to several Wall Street Journal reporters who conducted an analysis on the ridesharing and taxi industry, Sidecar came out the transportation service winner. Sidecar brought its pre-arranged driver service to the marketplace beginning in February 2014. Sidecar drivers now provide their price for the trip prior to a rider choosing the service. This gives the end user more options and a greater feeling of control. While Uber has “surge” pricing and Lyft has “prime-time” pricing for rush hour periods, Sidecar drivers set their own rates based on supply and demand, as well as any other perks they may want to offer a rider.

Taxi Regulations
Taxi regulations vary widely by state and locality, but can be generally categorized as those establishing or covering one of the following aspects of service:

Fare controls:
 * Minimum and maximum fares
 * A set base or per-mile fare
 * Means of fare collection
 * Method of calculating fares
 * Discounts for senior citizens or those with disabilities, and allowed surcharges for such things as rush hour service, late night and weekend service, radio-dispatch service by metered cabs, service to a destination outside the municipality, bad weather, and for extra parcels or luggage.

Restrictions on the total number of firms or vehicles legally able to accept paying riders, usually through licensing or issuing medallions:
 * Limitation on number of firms of vehicles
 * Requirement that each firm operate a minimum number of vehicles
 * Giving existing firms the right of first refusal over new taxi licenses

Restrictions on the type of service offered:
 * Limits on the sharing of rides (most jurisdictions prohibit the sharing of taxi rides without the permission of both riders)
 * Requiring an extra charge for additional riders
 * Requirements to provide service at certain times or places

Safety and quality regulations:
 * Restrictions on the type or age of vehicle
 * Vehicle safety standards
 * Liability insurance requirements or minimums

The criteria that regulatory bodies use to set fare controls are usually either a target operating ratio (operating expenses to gross revenues) or, less commonly, a rate of return on investment. Most jurisdictions require service to be provided to all customers who request a taxi, regardless of origin or destination or the passenger’s race, sex, age, or physical appearance.

In general, the public relies “upon the taxi regulating authority to enforce standards within the industry by regulating fares through meter inspections, safety of the vehicles through vehicle inspections, and driver integrity through background checks.”

Some operators of taxi stands, particularly airport authorities, limit the ability of taxis to serve the stand to those having a franchise agreement with the airport authority, and some prohibit any non-authorized taxi from picking up a passenger at the airport, even if they are allowed to drop off a passenger there. Airports with such limits in place include those in Los Angeles, Philadelphia, Houston, Dallas (Love Field), Phoenix, Cleveland, Columbus, New Orleans, Seattle, St. Louis, Pittsburgh and Miami. Los Angeles grants exclusive franchises to one firm for the use of each taxi stand in the city, while Pittsburgh auctions its airport franchise to the highest bidder. Some cities prohibit taxi companies from entering into exclusive contracts with hotels.

Taxicab and limousine commissions usually are established by and cover only one municipality or county and have authority only within its boundaries, though some metropolitan areas have regional taxicab commissions that cover multiple jurisdictions. They can generally be divided into one of two types: those managed by bureaucrats hired by county or municipal officials through established hiring processes, and those managed by boards consisting of appointees of elected officials. Those managed by bureaucrats tend to impose fewer regulations so as to reduce the amount of work they have to do to keep tabs on all the operators under their jurisdiction, while those managed by political appointees tend to impose more regulations, because they benefit politically from doing more and by satisfying multiple constituencies.

===Ride-sharing Regulations  ===

The transportation network company (Sidecar, Uber or Lyft) generally takes the place of government in enforcing standards for drivers and vehicles, though two states and the District of Columbia now have basic driver background and minimum insurance requirements in place for TNCs (see next section). Each TNC has its own regulations at the corporate level. Uber insists that state and local taxi rules should not apply to it or its drivers. TNCs' corporate rules include the following:

Safety

 * Background Checks - Each TNC requires that all drivers undergo comprehensive background checks, including being screened for criminal offenses and a litany of driving incidents before becoming a certified driver. Per the Fair Credit Reporting Act, background checks can extend to a maximum of seven years.  Uber's blog even mentions this criteria being more onerous than that required to become a taxi driver.


 * Vehicle Quality - Lyft and Sidecar both require drivers' vehicles to be model year 2000 and newer. In addition, they must pass a 19-point vehicle inspection.  Uber requires UberX vehicles to be model year 2004 and newer, mentioning that the average vehicle model year is 2008.


 * Document Verification - Each driver is required to show proof of insurance, vehicle registration, and driver's license. These are all verified and kept on file by the respective company.


 * Zero Tolerance Policy - If a rider suspects their driver is intoxicated, they are encouraged to report the violation to the TNC.

Insurance
Each network company carries its own insurance policy. Uber Lyft, and Sidecar each maintain a $1 million Liability Insurance Policy for drivers, through a third party insurance company. This coverage meets all requirements set forth by existing State and Local auto insurance regulations.

Pricing
The cost structure for Ride-sharing companies deviates from the normal taxi cost structure, which is based on meters built into each cab that measure distance based on wheel rotations and do not use Global Positioning Systems (GPS). Most notably, tipping is neither required or even suggested for various ride-sharing companies, whereas it is customary for taxis and limousines. In fact, tipping is not authorized with UberX, whereas Lyft and Sidecar allow the rider to add an additional amount to the fare prior to credit card authorization. Once the ride is complete, and the "meter" is turned off (via the driver tapping a "ride finished" button on his or her smartphone), the rider is free to go. With payment collection through the smartphone application, the transaction is seamless and thus less burdensome to both drivers and riders, though drivers generally have to verify the rider's identity to make sure they aren't charging the wrong person for someone else's ride. The rider's verbal confirmation of his or her name is usually sufficient, though in rare cases a driver may ask to see a rider's photo identification.

Uber implements "surge" pricing, and Lyft "prime-time" pricing, which raise the price to up to double the normal rate at times of high demand (based on the number of users with the app open looking to see if drivers are nearby). Ultimately, this practice ensures there is a sufficient number of drivers serving consumers. Uber has actually calculated an algorithm that gauges demand (number of users with the app open looking at available rides) against the number of drivers on the road to determine the appropriate pricing at any given moment. The impetus behind these pricing schemes is to encourage drivers to drive when demand is heaviest, such as on holidays, rush hours, after large events, and at times of inclement weather, and to ultimately serve more customers. TNCs fully disclose when surge or prime pricing is in place, requiring customers to accept prior to booking.

Snapshot of State Taxi and Ride-sharing Regulations
California: The California Public Utilities Commission sets overall standards for taxi companies, while municipalities handle licensing and on-the-ground oversight. The CPUC adopted regulations applying to ridesharing services in 2013 that were widely seen as victories for the ridesharing companies.

Colorado: Similar to California, Regulation of taxi services, use fee and driver fines is divided between the municipal government and the state’s Public Utilities Commission. The municipality issues driver permits and taxicab stickers, while the state regulates entry, rates, service, financial dealings, and even exit. Colorado also became the first state to formally authorize UberX and Lyft and enact regulations applying to them.

District of Columbia: On October 28, 2014, the DC Council passed a law formalizing the legal operation of smartphone-based ridesharing services, and essentially formally approving the regulations the TNCs had already put in place, creating one set of regulations for TNCs and one set for common carriers (traditional taxi companies that actually provide transportation services). The new law requires TNCs to provide commercial liability insurance from the moment their drivers open their apps as they cruise for rides. The minimum level of coverage will vary depending on whether there is a passenger in the car: When a driver is logged into the app but has yet to accept a ride, the TNC must provide at least $100,000 in liability coverage. When a passenger who booked a ride through the smartphone app actually is in the car, the insurance coverage climbs to $1 million. TNCs will not have to change their background check policies.

Florida: State law vests county Public Transportation Commissions with the power to regulate taxis.

Maryland: The state Public Utilities Commission sets standards for taxicabs and, as of August 2014, still classified ridesharing services as common carriers, requiring they adhere to the same regulations as taxis.

Massachusetts: the Commonwealth’s Division of Standards sets taxi meter standards. The Division “initially sought to shut down Uber in the state in August 2012, because it could not guarantee the company’s smartphone meters measured distance correctly. But the agency quickly reversed course, after Democratic Gov. Deval Patrick’s office publicly backed Uber.”

Nevada: The state directly regulates all taxi companies operating within its borders, and municipalities have no role in oversight. As a consequence, the taxi markets in Las Vegas and Reno are dominated by single, all-encompassing companies. Hence, ridesharing services have not yet been able to enter the Las Vegas and Reno markets. Also of note is that Nevada has the single highest level of taxi company contributions to state-level political campaigns, at over $3 million in 2010, followed distantly by New York and California.

Pennsylvania: The state Public Utilities Commission sets standards for taxis and limousines, and as of September 2014 has granted Uber and Lyft only temporary authority to operate.

Washington State: The state legislature is currently considering enacting safety and insurance requirements that would apply to ridesharing services. Seattle has enacted regulations precluding each Transportation Network Company (TNC) from having more than 150 drivers providing service at any given time.

Ride-Sharing Effects and Controversies
The most significant operating costs within the taxi industry are drivers’ wages and fuel. There are few economies of scale in taxi operations, so small companies can compete effectively with big ones. As local commissions usually fix fares, companies can only increase profitability by hiring the cheapest available labor. Therefore, most drivers are part-time employees paid by flat wage, by a percentage of the revenue their trips earn, or as independent contractors who pay for fuel themselves and pay the company a fixed amount per day or week. The industry is labor intensive, with average annual salaries hovering around $25,000. Conversely, the average UberX in New York City driver driving 40 hours/week, is pulling in approximately $90,000, while San Francisco drivers average around $74,000. The recent spike in ride-sharing, unlicensed for-hire vehicles, is directly impacting the taxi economy in various cities. This trend is likely to continue unless the taxi industry advances its technology to compete with ride-sharing. Many taxi and limousine companies receive referral business from travel companies, hotels, hospitals, bars and restaurants with which they have financial arrangements.

Unlike conventional taxi or limousine firms, TNCs do not own cars or employ drivers. They are funded through drivers paying a commission for the privilege of the company linking them to riders. Given that these companies do not fall under the same classifications as taxi services, they have been held to different standards and regulations. As such, taxi drivers, on a global scale, are furious that ride sharing networks and their respective drivers are not subject to the same regulations. They are conducting protests, including causing traffic jams in cities from Washington, DC to London and Paris, and demanding that ride sharing regulations mimic those of the taxi industry, or that the taxi industry be deregulated. As one cabbie said, "we just want jurisdictions to level the playing field"

Uber, Lyft and Sidecar all maintain that they are not transportation providers like taxi companies are, and are therefore precluded from various state and local regulatory requirements. Such rules and boundaries determine who can own taxis, where and how they operate, how much they charge and how they are paid, how they get riders, even their color and the brightness of their dome lights, the car's paint scheme, the type of meter to be used, and more.

Regulations are in place for the general public as well, including the limitations of drivers on the road that ultimately increase traffic and greenhouse gas emissions. Many jurisdictions enforce tight emission standards for taxis, while Uber and others are not held to such standards. This has attracted complaints from environmentalists. Ride-sharing start-ups are not looking to scale back on the number vehicles on the road; this will only happen through regulatory action. Studies and reports are starting to identify cases where revenue and usage is decreasing from not only the taxi industry, but also from public transportation. .

The Federal Trade Commission's Frankena and Pautler identified in 1984 perhaps the key aspect of taxi regulation that allows unregulated ridesharing services to gain a competitive advantage, especially ones that are able to adjust pricing in real time to match supply with demand (as Uber and Lyft do with “surge pricing”):

"[M]ost regulations impose an inefficient uniformity on the market. For example, it might be efficient to have different qualities of cab service available at different fares. However, fare or quality regulations might lead to a homogeneous service. Also, fare regulations and requirements to use meters are likely to interfere with efficient variations in fares between peak and off-peak periods, between different parts of the city, and between radio-dispatch and cruising service, and they are apt to interfere with the market's ability to reallocate resources in response to changes in costs and demand."

Cooper et al. argue that “it is in the public’s interest to regulate taxicabs, the absence of regulation resulting in a lower level of service to the customer. There is the social commitment that a community has to its citizens and visitors alike that this vital public transportation service will be available, safe, and economical to use. Rates are balanced to protect the user from onerous or arbitrary fares but to still yield the provider sufficient funds to continue in business and make a modest profit.”

Frankena and Pautler maintain that regulation is economically justified when it produces benefits that exceed its costs. Any other form of regulation is based on justifications other than helping the market function more efficiently. They argue that only these types of market failure provide economic justification for regulating the fares and service levels of the taxi industry (aside from safety and liability insurance requirements, and requirements to post fares conspicuously inside and outside of cabs, which do not directly affect fares):


 * Over or under-production of services, production of the wrong qualities of service, or unnecessary high costs of producing a given output
 * To prevent fare bargaining or haggling
 * Charging taxi operators user fees to use taxi stands (in the absence of this, you get a “tragedy of the commons” situation with competing cabs jockeying for space).

The primary market failure stems from the fact that the customer has little or no informed choice among competing operators when hailing a taxi on the street or picking the first cab in line at a taxi stand. Ride-sharing companies have a distinct advantage in this regard because they make driver and service information available to customers through their smartphones. Street-hailed taxis, and those encountered at taxi stands, cannot match this level of information at the customer's fingertips. An individual hailing a taxi is not privy to that driver's insurance coverage, safety record, etc. It would be more costly and cumbersome for governments to require a plethora of information to be presented to taxi customers than simply to mandate that all taxis meet minimum insurance and driver qualification requirements.

The demand curve for taxi service relative to fares may not be perfectly elastic if potential riders cannot costlessly select the cab charging the lowest fare. Interestingly, of the ridesharing services currently available in multiple US cities, only Sidecar lets users compare fares on their smartphones before selecting a ride. With Uber and Lyft, the fare is calculated based on distance and time, which varies based on the route that is chosen, and thus can’t be determined before a ride begins. However, it should be possible for services like Hailo or FlyWheel that use regular metered taxis to estimate the fare based on the recommended route and the meter fare per mile, plus the base fare and any taxes or fees. Hailo has not yet done this.

Mobile technology is changing traditional taxis as much as it has introduced competition to them. “The pre-booked [taxi] market has developed significantly in recent years with the advent and widespread use of mobile phones allowing for faster bookings, removing many of the barriers associated with pre-booked vehicles particularly in reducing delay.” Cooper et al. note, perhaps predicting the ridesharing revolution, that “If limousines, especially sedans, are permitted to provide taxi type services with no regulation as to rates and charges, then the taxi industry is effectively deregulated as to entry.”

Discussion Questions
Should ride-sharing companies, such as Uber, Lyft, and Sidecar, adhere to the same regulations as the taxi Industry?

Should the taxi Industry be de-regulated? Would doing so give riders greater choice and lower prices without sacrificing safety, service quality, or an adequate geographic distribution of service?

Does the rise of ride-sharing services and the increased use of smartphone apps for requesting rides put those without access to smartphones at a disadvantage? How should they be accommodated?

Frankena and Pautler argue that most current fare and level-of-service regulations on the taxi industry are not economically justifiable, but non-economic reasons are offered for maintaining them. Are these reasons valid? If so, how else would you go about achieving goals such as guaranteeing a minimum level of for-hire vehicle service to all parts of a city, protecting public transit systems, and maintaining a city's image?

Conclusion
Many times when a more advanced, more customer-friendly product is unveiled, it poses a significant challenge to the viability of the incumbent product with which it competes. The incumbent must adapt to what has become the "new normal," or else become obsolete. While they have faced legal challenges at length, Uber, Sidecar, and Lyft continue to expand and thrive, continually adapting to the market. Diamandis states it well and to the point: "Regulation can only stay the change for a short time. And during this time of accelerating change, where the only constant is change, we will be seeing a lot of 10x improvements challenging the norm".



We are hopeful that the issues of fairness in competition will work themselves out so that all individuals and companies offering for-hire vehicle services will be able to easily connect with customers -- whether through smartphones or other means -- and make a decent living or a profit, and making the overall for-hire vehicle market more efficient, reducing the amount of time that vehicles are being driven empty in search of paying riders. We also expect that state and local governments will eventually adapt to the ride-sharing model, either reducing fare and service level regulations all around so that taxi companies are able to innovate and compete with ride-sharing on the basis of price, or creating two tiers of regulation: one set of rules for TNCs that exclusively use smartphone-based haling and another for taxis that rely on street hails, radio dispatching, or serving taxi stands.

Perhaps one of the ultimate positive outcomes of the "ride-sharing revolution" will be to give more Americans (at least those living in metropolitan areas) the freedom to get around easily without a car. Along with smartphone apps that demystify transit routes and schedules and connect users with other options such as car sharing and bike sharing, ride-sharing services are part of a new wave of technology that makes getting around by means other than driving one's own car more intuitive and accessible. The ultimate outcome may be that more Americans find themselves able to go car-free or car-lite, thus reducing congestion and all the other negative social and environmental impacts associated with the majority of travelers driving alone.